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Everything you need to know about tax saving fixed deposits

Fixed deposit

Amit has started making plans for investing, not just to save tax, but also for the long-term. When he searched online for the best options, he kept getting an endless list of traditional and modern investment avenues. Being aware of how unpredictable the market has been, Amit was cautious of market associated risks. His friend suggested he look at traditional investments like Fixed Deposits (FD). Amit had never considered traditional instruments to invest in before, especially from the point of view if saving tax. Let’s see if fixed deposits are exactly what Amit needs:

What are Fixed Deposits?

FD are mostly a long-term, traditional investment asset class. These are offered by banks and other lending entities at competitive interest rates which vary from one entity to another. Anyone can invest in these and often, senior citizens are offered better interest rates than other investors. These are great if you have a lump-sum amount ready and not sure where to invest. At maturity, you’ll not only receive the initial investment amount, but also, the accumulated interest. The main reason these are popular is, the interest rates are not dependant market cycles. So, if you’re risk-averse and yet want a return on your investment, coupled with tax efficiency, investing in a FD is a great choice. Second, most people choose these for wealth creation and retirement planning. The reason is, once you invest, you know your money is safe and it will continue to grow. The fact that the interest gets compounded at pre-set intervals (monthly, quarterly or yearly), ensures a steady flow of income. Which translates to your money not being stagnant.

Tax Saving Fixed Deposit:

When choosing to invest in FD, Amit should consider not only savings, but also, income tax implications of his investment. Here’s are the features of a typical tax saving fixed deposit:

Lock-In Period: These have a lock-in period of 5 years.

Tax Exemption: Exempt u/s 80C of the Indian Income Tax Act—1961. The maximum amount allowed for exemption is ₹1.5 lakh, in any financial year.

Holding Pattern: Can be held singly or jointly, however, in case of joint holders, only the primarily holder can avail income tax benefit.

Tax on Interest: TDS (Tax Deducted at Source) is applicable on interest earned.

Premature- or Part-Withdrawal: Since there is lock-in period of 5 years, premature- or part-withdrawal isn’t allowed. On maturity, the holder will receive the initial lump-sum and accumulated interest.

Despite recent cuts in FD interest rates, they continue to top the chart when it comes to tax-saving investments. Investing in an FD scheme can help you save tax on your annual income.

Tax-saving FDs are the same as other fixed deposits by banks as redemption on maturity comes directly to your bank account.

With these tax-saving deposits, you can get tax deductions under Section 80C of the Income Tax Act. They are of two types of tax-saving deposits: single-holder and joint-holder type deposits.

The lock-in period for tax-saving FDs is a minimum of five years and a maximum of 10 years. Do note that no partial or pre-mature withdrawal is allowed.

Different banks offer different interest rates for regular depositors including individuals, senior citizens, NRIs and bank staff. The interest rates vary depending on different categories of applicants.

Features of Fixed Deposits:

From what Amit read and understood, here’s what he could gather:
• These are safe and long-term investments.
• He can invest a lump-sum amount at one time.
• Regular interest pay-outs either monthly, quarterly or annually.
• Wealth creation and growth.
• Great savings and retirement-planning investment option.
• Tax efficient.

Amit wondered “what is tax-saving fd?”, let’s explain it to him.

Interest Rates on Fixed Deposits:

As mentioned earlier, Amit can choose a FD from any bank or lending institution. The interest rates will vary, but he can choose from the most competitive. Why is it necessary to choose the best? Because, a good interest rate, will in-turn give good returns at maturity. Moreover, investing in one will give tax payers like Amit an exemption u/s 80C of the Indian Income Tax Act—1961. To open a FD, Amit will have to submit his PAN Card and address proof. The account is referred to as Term-Deposit account.

The interest income or interest earned on a FD qualifies for TDS. Which means, when your investment earns interest, the issuer will deduct tax applicable before it accumulates. This tax is applied annually, and it will reflect in the account. Amit wondered if there was a way to save on TDS?

TDS is applicable on an individual’s income tax bracket so, if a tax payer has 0 taxable income, he/she can submit forms 15G and 15H. Form 15H is essentially for individuals below 60 years, and Form 15G is for senior citizens. These forms need to be submitted every financial year, at the time of filing returns.

Fixed Deposits Over Mutual Funds or PPF:

Versus PPF:

Among traditional investments, even PPF qualifies, let’s explain the difference between these two.

Different Lock-In Periods: The lock-in period for a PPF is longer—15 years. Investing in a tax saving fd, requires only a 5-year commitment.

Interest Rates: The interest rate on a PPF is static, since it’s determined by the Central Government. Whereas, investors can avail competitive interest rates on fixed deposits offered by banks or other lending entities.

Premature- or Part-Withdrawals: A PPF will allow part-withdrawals only at specified intervals. In a tax saving fixed deposit, neither part- nor premature-withdrawals are allowed.

Tax Exemption: Both these qualify for exemption u/s 80C.

Investment Amount: There’s no maximum limit on a FD investment, however, each bank may have its individual policy. The maximum investment in a PPF is ₹1.5 lakh in any financial year.

Versus Mutual Funds:

Amit had considered investing in mutual funds as well, however, if he had to choose, his decision would be based on these factors:

Risk:Reward Ratio: Equity-Oriented mutual funds give great returns; however, they’re tied to associated market risks. Interest rate on your FD account is not affected by market movements or economic cycles. You can get steady returns on the latter at lesser risk.

Cost of Investing: Mutual funds require an entry and exit fee to be paid by investors. Fixed Deposits are cost-effective because these costs are absent.

Tax Implications: Not all mutual funds give tax benefits u/s 80C. All tax saving fixed deposit investments are exempt up to ₹1.5 lakh per year.

After weighing all options, Amit decided to open a fixed deposit account. All he had to do was log-in to his internet-banking account, or, mobile-banking app and fill out the information online.

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